The ripple effects of the global fertilizer crisis on India

After his father died, Danoda gave up college and took up farming full-time. All exit routes were shut and there was no escaping from the realities of farming. So, last October, when an acute shortage of fertilizers hit pockets of the Haryana state in northern India, Danoda joined a group of farmers to block highways and sat on a hunger strike for three days.

“Dealers were charging ₹500 more than the MRP (maximum retail price) for a bag of DAP (diammonium phosphate, a widely used fertilizer). Some sold DAP and urea only if we bought expensive pesticides and seeds," Danoda complained over phone from his village in Jind district of Haryana.

Following the protests and after supplies trickled in, DAP, which is critical to growing wheat and mustard, was rationed to farmers. Danoda stood in the queue with his mother to collect their quota which was insufficient. By his calculations, the losses on account of unavailability of DAP was about ₹34,000—the sum of lost yields and money spent on substitute nutrients which were of little use. To be sure, wheat yields also took a hit due to an ongoing heatwave beginning March.

Around the time Danoda sat on a hunger strike, farmers in Madhya Pradesh took to looting warehouses while local police raided errant traders who were hoarding nutrients. In Uttar Pradesh, a 53-year-old farmer died of cardiac arrest while waiting in a queue for more than a day.

The crisis was largely driven by a sharp rise in international prices of raw materials like ammonia and phosphoric acid used to manufacture fertilizers, coupled with rising energy prices. Going by numbers shared by the fertilizer industry, between March and September 2021, cost and freight rates, or CFR, for muriate of potash (MoP) and DAP shot up by 25% and 70%, respectively.

In India, the price farmers pay for fertilizers is determined by local cost of production, price of imported ingredients and the extent of government subsidies. As the federal government stepped in with more support in 2021-22, its total subsidy bill rose to a staggering ₹1.4 trillion (revised estimate), up from ₹80,000 crore the previous year. A part of these subsidies went to clearing pending dues to the industry.

Rising energy consumption precipitated by a global economic recovery led to energy prices climbing up since late 2020. As natural gas prices rose sharply in mid-2021, so did fertilizer prices since gas is a key input.

The global fertilizer situation took a turn for the worse with Russia’s invasion of Ukraine in end February. The conflict in the Black Sea region which is a hub of production and trade in fertilizers, natural gas and grains led to an unprecedented rise in international prices of major nutrients alongside a sharp spike in prices of farm commodities. The nutrient shortage is now threatening to impact global production and yield of a variety of crops in addition to pushing farm input costs higher.

“Since the beginning of 2020, nitrogen fertilizer prices have increased fourfold, while phosphate and potash prices (rose) over threefold," Chris Lawson, head of fertilizers at the commodities research firm CRU group, told CNBC in an interview in end-March. Lawson warned that a protracted shortage will impact yields worldwide and push food prices higher.

As global food prices rose 13% (month-on-month) reaching a new all-time high in March, Director-General of the Food and Agriculture Organization of the United Nations (FAO), Qu Dongyu, sounded the alarm on 8 April. “Today’s high fertilizer prices could lead to lower fertilizer use next season and possibly beyond, with the real prospect of a drop in food productivity leading to even higher food prices," Dongyu said. “This would potentially result in even more undernourished people in 2022 and months to come."

One overarching theme that is playing out globally is elevated crop prices which are at an all-time high and are in turn driving fertilizer prices higher due to rising demand from unsubsidized and large markets like Brazil and the US, said Varun Gogia, analyst with rating agency ICRA.

High commodity prices will likely spur producers to increase acreage, but there is uncertainty around yields given high fertilizer prices and the perennial wild card of weather conditions during the growing season, the US Department of Agriculture’s Foreign Agricultural Service (USDA-FAS) said in a note on 7 April, adding, “for agricultural producers around the world, high fertilizer and fuel prices are a major concern."

‘Touch and go situation’

India, which imports over 25% of urea, 95% of phosphates and 100% of potash it consumes, is now staring at a situation where either growers will be pushed to pay more for nutrients or the government has to step in with more support.

With crop prices soaring, farmers are unlikely to let nutrient shortages come in the way of higher production. So, rural India could witness a situation far worse than last winter if critical fertilizers go off the shelf. Last year, fertilizer sales were down by about 4% with sales of DAP shrinking by 12% year-on-year following the shortage. If manufacturers are forced to raise retail fertilizer prices (for phosphates and potash which are decontrolled), a part of the incomes realized by farmers due to the bull run in crop prices will be chipped off.

For decontrolled fertilizers, producers fix the retail price after the government announces a fixed subsidy per ton. Unlike urea, MRP of potash and phosphatic fertilizers are not fixed.

In addition to rising food and fuel prices, ensuring availability of fertilizers at last year’s prices could be the next big worry for the Narendra Modi-led government. In the words of an analyst who did not want to be named: “current stocks of non-urea fertilizers are at half of last year’s levels. NBS (nutrient-based subsidy) rates have to be increased very sharply, by two-three times (for the upcoming Kharif season), to ensure farmers do not pay a higher price. It’s a touch and go situation."

Does this mean farmers will purchase nutrients in advance? “I do not have the cash. We will first sell wheat and mustard and then purchase fertilizers when paddy planting begins in June (for the Kharif season). If we don’t get urea or DAP, we’ll block roads again," Danoda from Haryana said.

A few numbers reveal the gravity of the situation and the extent to which taxpayers may have to foot the bill, in terms of higher nutrient subsidies. Akin to a payback, after years of cheap food.

Early April, international spot price of DAP was around $900 per tonne or ₹3,375 for a 50 kg bag. This is priced at ₹1,350 per bag in India, or a subsidy of more than ₹2,000 per bag. Similarly, international urea prices were at $1,130 per tonne or over ₹4,200 for a 50 kg bag which is sold to farmers for ₹268 per bag, or a subsidy of close to 95% on imported urea. Further, for every $1/mmbtu rise in natural gas pooled price—about a third of the natural gas used for domestic urea production is imported—the subsidy requirement for the urea sector increases by around ₹5,000 crore.

According to USDA-FAS, India will likely be able to weather the possible disruption of agricultural fertilizer supplies from Ukraine and Russia in the short-term (upcoming Kharif season) but a protracted war will affect its ability to adequately fertilize winter crops which include the major staples like wheat.

How is India responding to the crisis? There is an impact globally in terms of prices and a host of factors are involved which makes it difficult to take a call on the extent India might be hit, a senior official with a urea manufacturer said on condition of anonymity.

“Our assessment is that the government will absorb the price rise via higher subsidies for urea and phosphatic fertilizers and we do not see any significant threat to availability, particularly for urea. The government is also proactively trying to source nutrients from countries like Jordan and Israel for phosphatic and potash fertilizers and urea from the Middle East."

“Yes, there would be problems for non-urea fertilizers. For importers, it’s not an easy decision to take when prices are not stable and there is no blanket assurance from the government that the increase in prices will be supported by higher subsidies," the person added.

Managing a crisis

To be sure, the government is yet to announce the nutrient-based subsidy rates which expired last month. A delay implies that DAP manufacturers and importers will have to wait for the NBS rates to be announced before imports are contracted and production is ramped up. In March, DAP retail prices were raised by ₹150 per bag to ₹1,350. However, despite the increase, manufacturers are incurring losses due to the surge in international prices (which shot up from $575 to $900 per ton in early April, year-on-year).

An industry insider who has spent over a decade with a DAP manufacturer explained the complexity of the situation. For over a year and even before the war in Ukraine began, fertilizer prices had shot up due to rising natural gas prices, with the European Union moving towards cleaner fuels, China putting a brake on exports and demand soaring in big consumers like Brazil in line with rising crop prices. In India too, also a top consumer, fertilizer consumption was robust in recent years on the back of a normal rains which led to a depletion of stocks. Fertilizer stocks in the country are now at its lowest levels in several years.

“The shortage of DAP last October in northern Indian states was primarily because these markets depend on imported fertilizer. With the government capping retail prices, a shortage was natural," the person quoted above said.

For 2022-23, the budget has allocated about ₹1 trillion but due to geo-political tensions and the way prices are moving, subsidies will have to be raised to keep prices stable, said Pushan Sharma, director at CRISIL Research. Last year, subsidies for phosphates were raised by 140% to ensure prices paid by farmers do not rise. It could be a repeat for phosphates and potash this year.

“The government is proactively trying to arrange supplies. The opportunities lie in imports from Canada and Israel (for potash), Saudi Arabia and Morocco (for phosphates) and China (for urea). We don’t see fertilizers posing an availability challenge for but given how prices are moving, NBS rates will have to be revised upwards," Sharma said, adding, “it is difficult to put a number to the total subsidy bill given how volatile the situation is."

The direct impact of the war on fertilizer markets will first be felt during the upcoming crop seasons in India and Latin America, Rabobank said in a research note earlier this month. India is partially out of danger as it has secured some potash and substantial volumes of nitrogen in recent months to meet its immediate needs; but it will likely have to act again in the coming months, the note added.

Understandably, some are unwilling to take a chance. Abhishek Raghuvanshi, a relatively well-off farmer tending to large tracts of land in Vidisha district of Madhya Pradesh, is planning to stock fertilizers for winter crops. Those will be planted six months later, around October-November. “In Kharif we use very little fertilizers for growing soybean and pulses. My sense is that the real crisis will hit in winter when demand for DAP and urea is high," he said.